Black Swans

Background

As Covid-19 pandemic has shown, our society faces a wide range of systemic disruptions, threats, and risks.  From large-scale terrorist attacks on critical infrastructure, to extreme solar storms, to cyber-attack to pandemics to climate change to geopolitical risks, we face constant external threats that have the potential to reap catastrophic economic damage. Rare, systemic risks do not respect borders, and they are likely to have an international impact and will require an international response.  

Rare, systemic risks, when they do manifest, they tend to cause common consequences as they cascade through many of the sectors of society, and their effects are felt across multiple dimensions such as human welfare, economic damage, disruption to essential services, environmental damage, behavioural impacts, and impacts on national security and international relations.  

Systemic risk such as pandemics, solar storms, large-scale cyber attack, and climate catastrophes are not traditionally included in standard business interruption cover insurance, and, as experienced during the pandemic, the uncertainty over different policy applicability to cover the risks associated with the pandemic has lead to legal challenges for business’s trying to access pay-outs.  

For this reason, it is essential that we move forward and plan for the impact of systemic risks in terms of linked, and cascading secondary risks triggered by these extreme risks and focusing on the common consequences triggered by these events, and insure against these systemic risks by structuring and developing new models that will shift the burden from the taxpayer to the private sector.   Otherwise, not doing so will put the economy at risk by reducing or inhabiting lending and most likely leave the government footing the bill for another certain contingent liability.  

The overarching objective of the Black Swans Working Party is to be a source of knowledge and expertise within the Institute and Faculty of Actuaries (IFoA) on matters relating to systemic risk planning and insurance, by developing a model to allow for a comprehensive and affordable systemic risk insurance to be offered, protecting the UK safeguarding society and livelihoods from these extreme risks.

Key objectives

The roadmap to develop a framework which will be used to achieve the following strategic goals: 

• To robustly identifying systemic, high impact risks those are considered improbable or unlikely events.
• Mapping the linked, compound and cascading consequences of rare events.
• Developing a framework for risk assessment of rare, systematic risks that is dynamic, and data driven.
• Identifying and building robust methodologies for understanding, assessing, pricing, modelling, different systemic risks with different characteristics, different risk profiles, and different assumptions for modelling the frequency and severity of the risk and coming up with a range of risk reflective pricing charged for these products to reflect a long term black swan risk premium.
• Designing and risk sharing a product that is affordable, available and relevant that covers either each rare event, or an all encompassing product that covers tail events in general, taking into account:

1. Type of product
2. The limits of indemnity – whole loss or part of it?
3. Is the product Index,  parametric, or modelled loss, or some hybrid in between?
4. Is it mandatory / optional?
5. A Black Swans product that is designed to take behavioural aspects into consideration so that it incentivises behaviour rather than making it compulsory to affect premium rates.   

Membership